Medicare and medical expenses are among the most misunderstood parts of retirement and retirement spending. Many surveys have documented how ill-informed both financial professionals and individuals are on these topics. It’s no wonder that the leading cause of financial difficulties in retirement often is cited as medical expenses that aren’t covered by insurance or Medicare.
By now, most of my readers know that Medicare covers only about half the medical expenses of the average beneficiary. You also should know that many covered expenses have a 20% copayment. You owe 20% of the bill, no matter how high the expense.
Now, let’s stop looking at the forest and move closer to look at some of the trees. Here are some items that often cost people a lot of money, expenses that easily could have been avoided.
? You’re supposed to sign up for Medicare Parts B or C within the six months that begins before your 65th birthday and ends three months after that birthday. It doesn’t matter whether or not you are beginning Social Security retirement benefits. In most cases if you don’t sign up for Medicare during this time, when you do sign up for it you’ll pay a penalty of higher premiums for the rest of your life. The same goes for Part D prescription drug coverage.
? There’s a no-penalty extension in your Medicare sign up deadline if you are covered by a qualified medical expense plan during your initial enrollment period. This is an area where people often receive wrong information. Qualified coverage means a group plan through your employer (or former employer if you have retirement medical benefits), and the employer must have 20 or more employees. That means if you work for (or are retired from) an employer with 19 or fewer employees or are self-employed, your medical insurance doesn’t qualify for the extension no matter how good the coverage is.
? Some people believe they don’t have to sign up for Medicare because they have coverage through an employer group plan with 20 or more employees. But a lot of group coverage says that once a covered person turns 65, his or her primary insurer is Medicare. The group plan will pay only for care that Medicare doesn’t cover. Read your employer plan closely. If it designates Medicare as the primary insurer, you could be responsible for anything Medicare would have covered.
? Once you leave an employer or otherwise lose qualified employer coverage after age 65, you have eight months to sign up for Medicare and avoid late enrollment penalties. Here’s another trap. When you retire from or otherwise leave an employer, you’re entitled to pay for the employer coverage for another 18 months through COBRA. But be careful. COBRA coverage doesn’t extend your special Medicare enrollment period. You have eight months after leaving the employer to sign up for Medicare, not the 18 month COBRA extension period.
? Medicare Part A doesn’t have a premium, but Part B does. Many people think Part B doesn’t have a premium, because it is deducted automatically from Social Security benefits if you’re receiving them and are enrolled in Medicare. You also can opt to pay for Medicare separately instead of having it deducted from your retirement benefits.
You probably don’t want to opt for paying the Part B premium separately. Social Security benefits increase each year only at the Consumer Price Index inflation rate, which in recent years has been low. Part B premiums have been increasing at more than twice the rate of Social Security benefits. But if your Part B premiums are deducted from Social Security, your Part B premium increases no more than the increase in your retirement benefits. The law says that an increase in Part B premiums can’t cause a net reduction in Social Security benefits. But that doesn’t apply to those who pay their Part B premiums separately. They have to pay the full increase in the Part B premium.
Those who are some years from retirement need to keep the different rates of growth in Social Security benefits and Medicare premiums in mind. With Medicare premiums increasing much faster than Social Security benefits, when you retire the Part B premiums could take a large percentage of your Social Security benefits.
? The higher your income, the higher your Medicare premiums will be. The higher premiums begin for individuals with modified adjusted gross income above $85,000 and for married couples filing jointly with MAGI above $170,000. They also pay higher premiums on Part D prescription drug plans if they have such coverage. The thresholds aren’t indexed for inflation, so more people will be subject to the higher premiums simply because of inflation.
The tax return for two years earlier determines your Medicare premiums. For example, 2013 tax returns determine 2015 Medicare premiums. You can appeal for a lower premium if there’s been a change in your situation, such as a divorce, unemployment, death of a spouse, or something similar. Social Security receives your tax return information from the IRS and tells you in the fall of 2014 what your Medicare premiums will be for 2015.
Tax-exempt bond interest is included in MAGI for this purpose. Not included are distributions from health savings accounts and Roth IRAs and 401(k)s. Also not included are proceeds from reverse mortgages, loans from cash value life insurance, and some distributions from annuities in taxable accounts.
Required minimum distributions from IRAs and other qualified retirement plans do count as income for the higher premiums. This means that traditional tax planning strategies that defer taxes into the future are likely to trigger higher Medicare premiums in retirement.
One-time taxable events also can trigger higher Medicare premiums two years later. These can include taxable sales of homes or other appreciated assets and conversions of traditional IRAs to Roth IRAs.
Bottom line: Be sure to consider the Medicare premium surtax in your tax planning.
Medicare is complicated, and the government doesn’t do a good job of educating people. You need to learn the details of Medicare and stay up to date if you don’t wan to leave money on the table.
RW November 2014.